Are We Outsourcing our Future?

Published: July 31, 2005, By Dr. Richard M. Podhajny, Ph.D. Contributing Editor

Material Science

For most of my career, research and development has been a necessary part of the business philosophy of most of my employers. R&D was used to develop new technologies and/or products that would lead to new sales with higher margins. A look back shows this philosophy worked effectively to put the US in a global technological leadership position.

The focus on R&D was not only in industry but was mirrored in academia and our national objectives. As long as we held to this philosophy, America controlled much of its own destiny; America’s investment in R&D was a major factor that provided technological leapfrogs and economic advantages. Over the last four decades, I have observed America’s R&D fall from its high pedestal. In fact, I would suggest we are in a free fall.

In post WWII, American technological innovations could be seen in every industry. New plastics, processes, and materials were being synthesized and commercialized in our industries. This expansion continued through the 1960s. Not till the early 1970s did we encounter significant competition, and it came from Japan.

The competition came at us by attacking a weakness of ours: producing products with questionable quality. Foreign products were being introduced that provided better quality at more affordable prices. The Japanese spent many years reviewing our processes and the quality of our products and improved upon them effectively.

The Japanese car of the 1960s that we considered “junk” became the “quality standard” by the 1980s. Cars, TVs, and other products soon were dominated by Japanese technology. Everywhere you look is evidence of how badly we lost that battle.

Actually, if you were reading US patents, you could see this foreign competition coming well in advance. As the competition came to our shores, many American companies reduced their R&D spending to stay competitive in the costs of producing their products. However, without the combined effort of R&D development and process efficiencies, we cannot stay competitive.

The battle continues today, and our long-term outlook is even more serious. Although we have been able to counter some foreign technology with our own improvements in production efficiencies, we have continued to reduce R&D spending in order to save money, while maintaining a minimum effort to stay competitive, and not much of the profit is being funneled back into R&D. As a result, we are less prepared to respond to growing international competition. Competition is coming from many sources, including China, India, and Malaysia, as well as countries near us, such as Mexico.

The current situation is even more threatening than in the past as our industries are outsourcing their R&D spending to reduce cost. Whereas it may cost $20/hr for a professional chemist to do R&D work in the US, China or India can provide a similar professional to do the same work for less than $1/hr. As a result, many large companies are moving their R&D facilities overseas to lower the bottom line cost of doing R&D. The economics are straightforward and offer benefits, but at what cost?

US companies have announced they will be outsourcing thousands of white-collar US-based jobs overseas. For example, IBM has replaced thousands of engineering, software development, and other high-skill jobs in developing countries to reduce the cost of R&D. The cost of outsourcing R&D will not be measured in dollars and cents but in our future ability to produce innovative products and be competitive in the world market. This spells a serious threat to our economy as well as to our other national interests.

If R&D is outsourced to foreign countries, what will happen to our college graduates? Where will the technical jobs be? I suspect the large number of technical jobs being outsourced in R&D will not be readily retrievable in the foreseeable future.

We have weathered economic storms before, but outsourcing high-tech positions will have dire long-term consequences. Unless steps are taken to stem the tide of sending our most highly skilled jobs overseas, we may be on the fast track to becoming a Third World nation.

Sadly, this will be Richard Podhajny’s last column. He passed away July 16 from a heart attack. See Yolanda Simonsis’s editorial for a tribute to Rich.